Entrepreneurship University
A Course in Personal Financial Planning

Basic Tools of Personal Finance

Four classes of assets form the majority of most investment portfolios:

  • cash and cash equivalents,
  • bonds,
  • stocks, and
  • tangible assets (e.g., real estate, gold, oil).

Cash denotes your current stash of legal tender and, in a financial planning context, generally includes money deposited with financial institutions that can be withdrawn without notice. Checking and passbook savings accounts are examples of such deposits.

Cash equivalents are defined as short-term investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Such investments are often referred to as “liquid.”

Liquidity refers to how quickly an asset can be converted into cash. Your house is not a liquid asset because it could take months to sell it. Stocks are somewhat more liquid than real estate, but you can lose money on stocks if you’re forced to sell at a time when the market for your stock is less than favorable. Even though interest on liquid investments may barely keep up with inflation, the lower risk is worth the lower return when you may need the money quickly.

Deborah Fowles suggests that checking accounts, saving accounts, money market accounts, certificates of deposit, money market funds, and short-term bonds are all good places to stash the cash you may need on short notice. These are the most liquid investments.

Checking accounts pay infamously low interest and may come with monthly service charges, so these are not the first choice for emergency funds. Another reason to avoid mingling your emergency fund with your regular checking account is that money in your checking account is too easily spent.

Savings accounts usually pay somewhat higher interest and segregate your savings from the money that covers your living expenses. They’re less likely to have monthly fees.

Money market accounts offered by banks (not to be confused with money market funds) may pay a little higher interest than either checking or savings accounts but limit the number of transactions you can make without a fee.

Money market funds, offered by brokerage houses and mutual fund companies, are NOT FDIC-insured like money market accounts are, so they’re not as safe.

Certificates of Deposit (CDs) are funds you lend to the bank for a specific period of time in return for a guaranteed, pre-determined interest rate. They come in different maturities, such as three months, six months, one year, five years, etc., and cashing them in early will result in a penalty, so they are not quite as liquid as the other investments mentioned. However, if you ladder your CDs you can avoid this problem.

Here are some resources you may find useful:

For the latest information on student loan programs seeabout government programs.

Wells Fargo helps you evaluate your credit.

More calculators …

Student Loan Advisor – Undergraduate Students

This Student Loan Advisor provides you with an estimate of the amount of educational debt you can reasonably afford, given the expected starting salary for your major. This advisor is for Undergraduate students; there are other versions for Master’s and Doctoral students.

The debt-to-income ratio is a standard tool for assessing whether a borrower will have difficulty meeting his or her repayment obligations. For example, most banks will refuse to issue a loan if the total of your monthly debt payments (i.e., mortgages, credit cards, auto loans, educational loans, etc.) exceeds 37% of your income. It is recommended that your educational loan payments represent no more than 10% to 15% of your income. This calculator uses the debt-to-income ratio and a projection of your starting salary to derive a manageable debt load for you.

A good rule of thumb is that for the Stafford Loan, the manageable debt load is about the same as your starting salary.

The following are from about.com:

Compound Interest Calculator
The compound interest calculator is intended to show you how how much you’ll have saved after a given number of years. You’ll know how much of your final balance is due to interest earnings, and you can use the compound interest calculator to see how different interest rates affect the outcome.

Generic Loan Amortization Calculator
The loan amortization calculator is intended to show you how your loan will work month-by-month. You’ll get an idea of how much interest you pay over the years, and how much of your balance is paid off at any given time. The loan amortization calculator includes an amortization table for your reference.